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Generation plan in itself inadequate to galvanise power investments

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Generation plan in itself inadequate to galvanise power investments

8th October 2010

By: Terence Creamer
Creamer Media Editor

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Much attention is being given to the second version of the integrated resources plan, or IRP2010, which government still insists will be promulgated during November despite delays to the public release of the document and despite the promise of further consultation.

Such attention is natural and correct, because the document is key to defining the country’s expectations of new power demand and how that demand could be met through various sources of production, from coal and nuclear through to solar, wind, hydro and biogas.

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However, while the IRP2010 is a necessary condition for stimulating much-needed power-generation investment, and will offer vital visibility of how the country expects to deploy the various technical solutions to restore the supply/demand balance, it is also inadequate to ensure investment.

It is easy to justify such an assertion, owing to the fact that very little of the private capacity sanctioned in the anaemic IRP1, which runs until 2013, has actually moved ahead. That is not because there isn’t money – the funding has been catered for in the second multiyear price determination. The problem is not an absence of a plan, as the IRP1 is in place. Instead, there are regulatory and contractual impediments to making these projects, which require debt finance, bankable.

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In other words, to extract South Africa from its current electricity investment no-man’s land is going to require more than just an IRP. I believe that there are at least five other things that will have to happen before we see the investments needed to keep the lights on.

Firstly, the funding gap at Eskom has to be closed so that the urgent baseload investment programmes can proceed, notwithstanding all the misgivings around the technology, project management and fuel sources selected.

Secondly, investors need certainty that there is indeed a solvent and technically competent counterparty to actually buy the power generated. In the interests of progress, it is likely that this buyer will remain housed within Eskom and that the much-vaunted independent system and market operator will be phased in over a period of time – not ideal, but probably the only realistic short-term solution.

Thirdly, there is a need for power purchase agreements (PPAs) that are fair to electricity consumers, as well as the new entrants, and for these PPAs to be awarded through procurement processes that are open and transparent.

Fourthly, should the grid remain in the hands of Eskom, even under a “ringfenced” arrangement, the assurance must be given that the procurement contracts will be honoured in practice. There is much anxiety about the lack of grid separation. However, Eskom has not even had the opportunity to prove its credentials in this regard owing to the other impediments that have blocked private investment.

Lastly, South Africa’s regulatory regime probably needs to evolve beyond the three-year tariff horizon to provide long-term investors with greater visibility of and certainty about the tariff path and the expected returns.

In other words, the IRP2010 will simply be a piece of paper unless several other actions are taken, and taken urgently, to facilitate investment by private power producers. Failure to move with the required urgency will surely lead to the lights going out.

Fleshing out Vision 2040
Meanwhile, it is interesting to note big business in South Africa is beginning to add flesh to its vision for transitioning the country from a developing to a developed one by 2040 – a plan that would also, no doubt, hinge on a stable and growing supply of electricity.

Such a move would involve, besides other things, raising per capita income from $10 000 to $30 000 a year – the average level achieved by Organisation for Economic Cooperation and Development member countries.

Business Leadership South Africa (BLSA) chairperson Bobby Godsell reports that 53 of its 80 members have submitted input on how their businesses could double, or treble, in size over the coming three decades and how South Africa could do likewise. BLSA comprises the largest 50 companies listed on the JSE, as well as multinationals, large black economic- empowerment enterprises and the leading State-owned enterprises

Speaking at a recent Swiss-South African Chamber of Commerce, Godsell stressed that the information was still being compiled and that further associated studies were also yet to be completed. However, three key themes had already emerged.

The first is related to the need to find new customers beyond the relatively limited market of 50-million South Africans, some ten-million of which were considered to have considerable buying power.

Broadening that market to the countries of the Southern African Development Community and the Common Market for Eastern and Southern Africa, which together comprise 500-million people and an economy with a combined gross domestic product of $800- million, could reduce the threat of market saturation.

But power, transport and communications infrastructure would have to be dramatically improved, and governments would need to pursue policies that fostered a more seamless movement of goods, services, capital and people within the region.

Secondly, the skills development and education systems in South Africa would have to be aligned to the economic needs of the country and the continent.

In fact, Godsell suggests that the educational system should make a break from its current bias of preparing scholars for university to embracing vocational streams that prepare students for technical careers.

This would require improving the teaching of mathematics and creating space to enable artisans to gain workplace experience. Further, the status of teachers would have to be materially improved so as to attract a higher calibre of individual to the profession.

The third pillar, of what Godsell described as a “new dream” for South Africa, would be to cultivate a culture of effective regulation, whereby the rules are transparent and consistently applied –

in other words fashioned in the US vision of a “country of laws, not a country of men”. In such a context, corruption and the ability to trade on political influence would be severely constrained.

 


 

To watch a video in which Business Leadership South Africa (BLSA) chairperson Bobby Godsell speaks on a 'new dream' to transform South Africa into a developed economy by 2040, click here.

 


 

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