Part 1: Context, Objectives and priorities for energy policy

The context for energy policy

Nearly every aspect of social and economic policy in South Africa is being re-examined, reformed and created anew. As government sets out on a path of growth with redistribution, many economic sectors require bold, new, imaginative thinking. More than most, the energy sector presents a challenge of transforming industries and governance systems in order to pursue new policy goals.

Before deriving detailed energy policy objectives, however, it is necessary to understand the context within which energy policy must be formed and the major challenges confronting the sector. This is achieved by considering, firstly, broader economic, social and environmental policies and forces, from both local and international sources; secondly, the dimensions and nature of the South African energy sector, as well as the linkages between the sector and the broader forces; and hence, thirdly, the challenges that have to be overcome in order for the sector to contribute successfully to the achievement of the overall policy goals.

International relations had a profound effect on South Africa’s energy sector during the apartheid era. The energy sector, dependent on oil imports for fuelling transport, and faced with a UN-led oil embargo and an international ban on nuclear materials, embraced patterns of investment shaped by a preoccupation with self-sufficiency. Massive, skewed and uneconomic investments were made in synthetic fuel plants and in the nuclear fuels chain. This legacy presents the sector with large and complex challenges, including a nuclear related industry which consumes two-thirds of the Department of Minerals and Energy’s state budget, and a petroleum sector with a labyrinthine set of regulatory controls.

South Africa’s energy sector is still influenced by international pressures, but in very different ways. As the economy opens up to global competition, energy sector policy and investment decisions need to ensure the availability of abundant, easily sourced, and competitively priced oil and nuclear fuel supplies. Other more subtle international influences are also being experienced as local policy developments inevitably acknowledge international trends in trade relations, foreign investment criteria, knowledge and information flows, and political and economic ideologies.

Significant shifts have occurred in energy policies internationally in the post-oil-crisis era and South Africa has the opportunity to learn from best practices from abroad. Perhaps the most significant international shift in consciousness is a realisation that commercial energy sources will not become scarce in the short or even the medium-term. The ‘limits to growth’ school of thought has receded. Energy security is now being achieved, not through self-sufficiency, but through greater diversification and flexibility of supply, including increased cross-border energy trade. One of the implications of this trend is that national, uneconomic energy industries are no longer being protected. Increasingly the energy sector is relying on cost-reflective or market-based pricing. As a consequence of these trends, the role of the state in the energy sector is being redefined and restructured. Greater emphasis is being placed on commercialisation, corporatisation and, in some cases, privatisation. Energy markets are generally being restructured to encourage greater competition, even in the grid-based electricity and natural gas industries traditionally regarded as natural monopolies, which has necessitated the development of increasingly sophisticated regulatory regimes. This does not mean that state involvement in the sector has disappeared; rather that it is changing and being redefined to maximise the achievement of national policy goals.

Global financial markets are also changing. The World Bank and other multi-lateral lending agencies have traditionally played a major role in financing the energy sectors of developing countries. Private finance is, however, becoming increasingly important, which has profound effects on the structure of energy investments and energy markets. The challenge for government is thus to create a policy framework with appropriate legal, fiscal and regulatory regimes which attract domestic and international investment, while ensuring that national policy objectives are achieved.

Another significant international issue is the physical environment. The energy sector has larger environmental impacts than most economic sectors, with associated greenhouse gas emissions feared to be a major contributor to global warming. Energy policies are already responding to pressures to reduce emissions as energy investments are subjected to greater environmental scrutiny. Other responses have included a greater focus on energy end-users, with policies to encourage energy efficiency and demand-side management being put into place. The research and development of alternative and renewable energy sources is also being promoted. As a signatory to the Framework Convention on Climate Change, South Africa intends to play a constructive role in the alleviation of environmental emissions. It is also possible that direct pressure will be placed on South African exports through environmental conditionalities.

Closer to home, South Africa is a member of the Southern African Development Community (SADC), which has adopted an Energy Co-operation Policy and Strategy, which focuses on energy trade (electricity, oil, gas and coal), information and experience exchange, training and organisational capacity building, and investment and funding. National energy policy must therefore seek to be compatible with regional energy policy.

The enfranchisement of all South Africans in 1994 has resulted in a profound reshaping of the country’s political economy as the material interests of the majority find expression through new social and economic policies. These new policies were first expressed in the ANC’s comprehensive Reconstruction and Development Programme (RDP) which was subsequently further developed into white papers by the Government of National Unity. Central to the RDP are two imperatives recognised by most South Africans: the urgency of achieving more rapid economic growth; and, likewise, the urgent need for growth to contribute to development, particularly the eradication of poverty. More recently the RDP has been positioned within the government’s new macro-economic strategy, entitled: Growth, Employment and Redistribution (GEAR). While this strategy places more emphasis on economic growth (6% per annum) and employment creation (400 000 new jobs), to be achieved by the year 2000, it retains key elements of the RDP such as income redistribution, meeting basic needs, developing human resources and democratisation.

The energy sector has both economic and social functions, in that it powers productive activity and also provides basic energy services for households. The sector therefore has the potential to contribute to economic growth and employment creation, as well as providing an important component of social infrastructure for households. The RDP base document included a number of policy proposals in this regard, the most influential of which has been the electrification target of 2,5 million household connections by the year 2000, which the industry is well on its way to achieving. By contrast, the RDP white paper and the Growth, Employment and Redistribution macro-economic strategy have not set out detailed sectoral strategies. The macro-economic strategy does, however, recognise that progress in meeting public infrastructure needs, such as household electricity, adds to the quality of life in communities, while simultaneously building productive economic capacity. The provision of basic household infrastructure is seen as a relatively low-cost and effective form of public intervention in favour of the poor, and consistent with the policy of reducing income inequalities.

Government has also prepared a protocol on the corporate governance of state entities, including those in the energy sector. This includes: formulation of dividend policies; performance objectives and appraisal norms; a revised policy regarding government guarantees; appropriate regulatory policies to ensure that pricing policies are fair and fully cover operating costs, while also promoting competition and protecting consumers against monopolistic practices; and a programme of asset restructuring with respect to the ownership and governance of state entities. The latter process is being undertaken with organised labour within the National Framework Agreement.

Macro-economic policy creates the overall framework within which sectoral policies are developed. Sectoral policies also have to take cognisance of linkages and overlaps with policy developments in related economic sectors, such as industry, mining, agriculture, and transport; in related basic needs and infrastructure sectors, such as housing, water, health, education, telecommunications, and the urban and rural development strategies; and in cross-cutting areas such as environment and science and technology. White papers in all of these areas have been, or are in the process of being, developed.

Energy policy must also take into account the legal framework provided by the revised constitutional dispensation, which has created new organs of government and demarcated specific powers and functions for the various spheres of government.

One of the spin-offs of the movement to democracy has been the greater participation of stakeholders in policy debates. Experience has shown, however, that there is a need for government to take a stronger lead in finalising policy decisions.

Having established the policy context for the energy sector, both international and national, it is now necessary to examine the problems and challenges internal to the sector, in order to be able to determine appropriate energy policy objectives.

It is not easy to provide a succinct overview of the energy sector, combining as it does more than six different fuel types, multiple supply institutions and various categories of users. In some ways energy is rather like money in the economy, in that it flows through and empowers all social and economic sectors. Perhaps even more difficult to understand than the complexity of this large sector are its linkages to, and impact on, the rest of the economy, not least because this is a very under-researched topic.

Including energy-related taxes and levies the energy sector contributes around 15% of South Africa’s GDP, and employs about 250 000 people. Eskom, Sasol and Mossgas together have accounted for a significant proportion of Gross Domestic Fixed Investment in the past, and investment in the energy sector will inevitably continue as supply capacity increases to meet growing demand. Taxes on oil industry products contribute about 10% of fiscal revenue. Coal exports and savings on crude oil imports, due to local synthetic fuel production by Sasol and Mossgas, contribute significantly to the balance of payments.

In some ways the energy sector has performed well. We have amongst the cheapest coal and electricity in the world and the Sasol synfuels process has spawned a massive downstream petro-chemicals industry. The size of the sector brings with it significant opportunities for contributing to economic growth, redistribution and human development. Economic, social and environmental distortions currently embedded within the sector can also be looked at as opportunities for improvement. There is thus considerable potential for the energy sector to contribute towards making the step change to a successful and sustainable national growth and development strategy.

Having described the context for South Africa’s energy sector, it is now possible to examine the overall challenges facing it, and consequently the key objectives that energy policy must pursue.

The RDP base document notes that:

Although energy is a basic household need, the vast majority of South Africans depend on inferior and expensive fuels... Future energy policy must concentrate on the provision of energy services to meet the basic needs of the poor, stimulate productive capacity and urgently meet the energy needs of community services, such as schools, clinics and water supplies.

Since the RDP was written the national electrification programme has achieved significant successes in addressing the electrification backlog. Nonetheless, some 50% of South Africans are still without access to electricity and relatively little has been done to improve access to other fuels. The social costs of current energy usage patterns are enormous, such as those imposed by the collection of scarce fuelwood resources. The majority of South Africans simply do not have access to affordable and convenient fuels of choice.

Moreover, even where access to fuels has been provided, it is often the experience of suppliers that consumption levels are low, and hence the benefits of more modern and convenient fuels are not felt. Clearly a range of complementary factors need to be understood and addressed in order to maximise the benefits of improved access to fuels.

Government will promote access to affordable energy services for disadvantaged households, small businesses, small farms and community services.

The achievement of this objective is fundamental to government’s reconstruction and development programme, and to the future socio-economic development of our country.

In pursuing this objective government acknowledges that the provision of energy services entails more than just the supply of fuels. Energy is only useful when it is affordable and sustainable, and when safe, easy-to-use, efficient appliances, consumer information and technical advice are available from service providers.

In formulating policies affecting household energy services, government also acknowledges the central role played by women in utilising these services.

An important feature of the energy sector during the apartheid period was excessive secrecy, which made rational and public debate on energy policy neigh impossible. For instance, the Petroleum Products Act of 1977 prohibited the:

publication, releasing, announcement, disclosure or conveyance to any person of information or the making of comment regarding the source, manufacture, transportation, destination, storage, consumption, quantity or stock-level of any petroleum product acquired or manufactured or being acquired or manufactured for or in the Republic.

The penalties were severe, and secrecy was effectively maintained. The restrictions were only repealed in 1993 following the lifting of the United Nations oil embargo. An unfortunate by-product of these regulations has been a lack of attention on the part of government to collect and publish data on the energy sector, which has, in turn, inhibited the development of rational and balanced energy policies.

The strategic nature of the sector, and the concomitant secrecy requirements, also led to a blurring of the roles and functions of the state’s various energy organs. Public policy processes were replaced by back-room decision making with minimal transparency. Inevitably such policy processes came to be dominated by energy industry managers who, by virtue of their knowledge and insight into the workings of the sector, were better placed to determine the strategic direction of their industries than government officials. This trend led to an imbalance in the power relations between central government officials and industry managers. This imbalance was further aggravated by a lack of stakeholder involvement in major policy decisions and a lack of representivity, particularly in terms of participation by blacks and women, within the energy sector generally.

The secretive nature of the sector also inhibited government’s ability to integrate policy formulation and co-ordinate policy implementation between departments and tiers of government.

As a result of this history, governance within the energy sector suffers from a low level of accountability and transparency. The severe capacity limitations on the central government department responsible for energy policy formulation aggravate this condition and mitigate strongly against government’s ability to undertake long-term planning and decisive policy processes.

Governance of the energy sector will be improved. The relative roles and functions of the various energy governance institutions will be clarified, the operation of these institutions will become more accountable and transparent, and their membership will become more representative, particularly in terms of participation by blacks and women.

Stakeholders will be involved in the formulation and implementation of new energy policies, in order to ensure that policies are sympathetic to the needs of a wider range of stakeholder communities.

Co-ordination between government departments, government policies, and the various tiers of government will be improved in order to achieve greater integration in energy policy formulation and implementation.

Government capacity will be strengthened in order to better formulate and implement energy policies.

Not only must government increase its capacity to deal with the pressing needs of the day, but it must also improve its ability to address long-term issues, such as the development of renewable energy resources to achieve a more sustainable energy mix.

The state has become deeply involved in particular energy sub-sectors. In some respects, this is unsurprising. Energy projects typically involve huge investments and governments have traditionally played an important role in expanding essential infrastructure in developing economies. The scale of these investments, and the period over which a reasonable return could be expected, has often been such that the private sector was unable or unwilling to invest the necessary capital.

The impacts of apartheid policies on the structure of energy sector have sometimes been disastrous. For example, the electricity distribution industry, linked to a system of racially segregated local government, became hopelessly fragmented and effectively incapable of providing electricity to the majority of South Africans.

Beyond having a large share in the ownership of the energy sector, government has potential access to numerous control mechanisms within the various energy markets. The electricity industry is an effective state monopoly, as is the nuclear industry, and, along with the petroleum industry, they are all tightly regulated by government policies and government regulators. It is only recently that coal prices and coal distribution were fully deregulated. Woodfuel is possibly the only un-regulated energy sector, although even here a modicum of regulation exists through certain traditional tribal authorities. The lack of effective co-ordinated government action can best be understood in terms of the absence of a coherent policy framework and the foregoing discussion on the need to improve governance within the energy sector.

An immediate policy challenge is therefore to correct for apartheid-based economic and social distortions through the restructuring of energy sub-sectors where appropriate. Over and above these corrections the sector also faces the challenge of becoming more efficient in order to contribute towards economic, social and environmental policy goals. This will necessitate the restructuring of complex governance systems, regulatory regimes and market structures, and applies particularly to the electricity, oil, gas and nuclear sub-sectors.

South African energy prices, particularly for industry and mining, are low by international comparison, and could have been lower if more economically efficient investments had been made. South Africa has an above-average energy intensity, in the sense that more energy is used per unit of economic output than in many other countries. In fact only ten countries have higher commercial primary energy intensities. The high energy intensity of our economy is largely a result of the structure of the economy and its reliance on coal for production of electricity and liquid fuels. Both of these energy transformation processes are relatively inefficient in their conversion of primary energy. Furthermore, industry has yet to employ recent technological developments in energy efficiency and government energy policy has historically favoured supply-side actions, rather than encouraging more efficient use of energy.

The energy sector provides crucial inputs for all forms of productive activity. One means of lowering inputs costs and improving the competitiveness of our economy is to improve the operation of energy markets.

Government will encourage competition within energy markets.

Nonetheless, government recognises the existence of, and potential for, market failures within the energy economy.

Where market failures are identified government will intervene through transparent, regulatory and other carefully defined and time delineated mechanisms, to ensure effective delivery of energy services to consumers.

Government also recognises the fundamental importance of pricing to the efficient operation of energy markets.

Government policy is to remove distortions and encourage energy prices to be as cost-reflective as possible. To this end prices will increasingly include quantifiable externalities.

The price of energy services to poor households will, necessarily, have to be subsidised at times since the fulfilment of basic needs remains a higher priority for government than the achievement of cost-reflective prices for this market segment.

If subsidies are required these should be implemented transparently in order to subject them to normal political forces.

Whilst acknowledging the negative economic impacts on the productive sectors of the economy that arise from the taxation of energy inputs, government nonetheless faces the reality of having to balance multiple objectives for the overall social good.

Energy taxation will continue to remain an option within government’s fiscal policy, but will be exercised with more consideration for the economic and behavioural impacts of such policies.

Government also recognises the need to stimulate fixed investment in the energy sector, from both local and foreign sources.

Government will work towards an investor-friendly climate in the energy sector through good governance, stable, transparent, regulatory regimes and other appropriate policy instruments.

Energy production and utilisation result in significant environmental costs, partly due to the effects of poverty and the historic inequality faced by the majority of South Africans in gaining access to fuels of choice. Recent studies have indicated serious health risks associated with indoor and outdoor air pollution, resulting primarily from coal and fuelwood combustion. Consequent exposures to certain air pollutants have, in certain cases, been found to be many times higher than local and international health guidelines, with epidemiological studies observing higher incidences of respiratory and other illnesses in inhabitants of unelectrified houses.

Although some energy-related environmental damage is long term, contentious and hard to define or quantify, there are clear short-term energy-related environmental issues which government needs to address. The plight of poor households deserves particular attention in this regard.

Government will promote access to basic energy services for poor households, in order to ameliorate the negative health impacts arising from the use of certain fuels.

Government will work towards the establishment and acceptance of broad national targets for the reduction of energy-related emissions that are harmful to the environment.

To this end energy-efficiency targets will be established and programmes will be mounted to conserve energy.

As indicated previously, energy policy under apartheid was governed primarily by the desire for greater energy security, which in turn led to very large investments in synthetic fuels and the nuclear sector. The cost to the economy has been significant and the opportunity for investment in more productive social infrastructure has been forfeited. South Africa has never become fully self-sufficient in either petroleum or nuclear fuels. When measured against the objective of self-sufficiency, energy policy under the apartheid government was a costly failure. Clearly, security of supply will have to be achieved through other measures.

Given the shifts in both the domestic and international situation, it is no longer necessary, or viable, to achieve energy security through policies of self-sufficiency.

Given increased opportunities for energy trade, particularly within the Southern African region, government will pursue energy security by encouraging a diversity of both supply sources and primary energy carriers.

The achievement of the energy policy objectives listed above will require the implementation of the many detailed policies, as spelt out in the following sections of this white paper. Given the context of scarce resources, and the need to provide direction for policy implementors, it is necessary to decide on relative policy priorities. Priorities have been divided into the short-term (1-2 years) and medium-term (3-7 years) and grouped as they relate to the various policy objectives. Where priorities address more than one objective they are listed under the most relevant objective.

In the short-term, government will concentrate on the following priorities (in no particular order):

• Improve the delivery of household energy services, including electrification
• Develop a national electrification policy, planning and financing system
• Treat off-grid electrification in the same way as grid electrification
• Facilitate the production and management of woodlands for rural households
• Establish voluntary guidelines for the thermal performance of low income dwellings

• Improve government’s capacity to govern
• Improve energy policy formulation processes by establishing a national energy policy advisory board
• Restructure the department of minerals and energy’s budget to reflect the new policy priorities
• Promulgate a new regulatory bill to consolidate the electricity regulatory regime
• Maintain the liquid fuel regulatory system until a re-regulated system, based on competition, has been planned and implemented
• Establish suitable energy information, statistical and database systems

• Encourage energy sector actors to facilitate economic empowerment, through the creation of SMMEs and by assisting previously disadvantaged people to gain entry to the energy sector
• Appoint an authority to oversee the restructuring of the electricity distribution industry
• Restructure the state’s other energy assets
• Develop and implement strategies to remove energy trade barriers, improve the availability of information and facilitate investment in the energy sector
• Introduce special purpose levies to fund dedicated regulatory and energy development agencies in a transparent manner

• Improve residential air quality
• Monitor the effect of electrification on the number and severity of fires caused by candles and paraffin
• Introduce safety standards for paraffin stoves
• Follow a no-regrets approach on energy-environment decisions

• Develop the Southern African Power Pool to the mutual benefit of all of its members
• Actively pursue energy sector co-operation with appropriate countries and international bodies
• Stimulate energy research and development partnerships between local role players and international agencies
• Actively facilitate regional co-operation on energy matters

In the medium-term government will concentrate on the following policy priorities (again in no particular order):

• Stimulate the development of new and renewable sources of energy
• Promote improved combustion techniques and appliances for fuelwood and other traditional fuels
• Support the development and implementation of capacity building, education and information dissemination programmes

• Facilitate the development of a research strategy to improve energy research and development
• Develop and implement an appropriate system to co-ordinate energy research
• Restructure state energy assets
• Implement new regulatory arrangements within the nuclear sector
• Clarify the mandate and role of the various nuclear energy bodies, including the separation of governance and implementation functions, by means of appropriate legislation
• Establish suitable renewable energy information, statistical and database systems
• Create appropriate institutional capacity to implement energy efficiency programmes

• Adjust electricity market structures to achieve effective forms of competition
• Establish regulations which promote a cost-of-supply approach to electricity pricing for non-domestic consumers
• Re-regulate the liquid fuels industry to achieve higher levels of competition and unrestricted market access
• Promote energy efficiency in all sectors of the economy
• Establish the necessary legislative and regulatory arrangements for the development of the up and downstream natural gas industry
• Develop standards and codes of practice for the correct use of renewable energy systems
• Introduce a voluntary energy appliance labelling programme

• Develop a policy on nuclear waste management
• Facilitate the monitoring, evaluation and demonstration of clean energy technologies
• Investigate options for the use of coal discards
• Monitor international developments and participate in negotiations on response strategies to global climate change
• Investigate an environmental levy on energy sales to fund the development of renewable energy, energy efficiency and sustainable energy activities

• Utilise integrated resource planning methodologies to evaluate future energy supply options
• Reappraise coal resources and support the introduction of other primary energy carriers as appropriate

As time passes and more information becomes available it may be necessary to amend these priorities.

This concludes the sections on the context, challenges, objectives and policy priorities for the energy sector. The following sections present detailed policies designed to achieve the energy policy objectives, divided into demand, supply and cross-cutting issues.

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